There is also interdependence between macroeconomic variables and housing markets. In advanced economies such as the US and the UK, movements in the macroeconomy have often been intertwined with property price changes. While the inter-relationships in quasi-laissez-faire economies and developing countries may not be on the same level as those of the mature financial markets, key macroeconomic variables tend to have significant impacts on the housing markets. Between the late 1980s and the early 1990s, for instance, increased wealth in the newly industrializing markets in Singapore, South Korea and Thailand played a significant role in the consumer boom in these countries. Further, interest rates and availability of credit are both crucial in determining home-ownership and housing consumption. Similarly, taxes and subsidies influence households, firms and financial institutions in making decisions about the demand for and supply of housing.
In many ways, therefore, housing prices and macroeconomic variables are closely linked. One well-known example is the collapse of house prices following the Asian economic crisis in the 1990s. Housing investment, therefore, responds largely to housing market conditions and to macroeconomic conditions, although the rate of response varies across countries and regions depending on the stage of economic development, the maturity of the economy and the extent of integration with the world economy. Many institutions determine the level of housing investments, home-ownership and housing consumption, the clearest example being mortgage and banking institutions. Such institutions are dominant in advanced market economies and, as a result, home-ownership rates are relatively high, contributing substantially to economic development and growth. In developing countries, per capita income is generally low and mortgage financing systems either nonexistent or at the early stage of development and, as such, informal financing is the dominant system. However, owing to a series of economic reform policies that were implemented in these countries in the mid-1980s through to the 1990s, the housing finance institutions have been created to enhance homeownership rates and housing consumption. Housing markets are driven by a series of inter-related factors, but the market itself can have strong economic effects on economic development and growth. This article discusses the direct and indirect effects of housing investments, the effects of housing investments on Millennium Development Goals (MDGs) and Poverty Reduction Strategy Papers (PRSPs), and negative effects of housing investments on national economies. Housing is a key component of the urban economy and a major sector of any economy.
The main direct effects of housing investments are growth effects (for example on gross domestic product (GDP)): employment creation, income generation and savings, financial mobilization, increase in labour productivity, economic recovery, and regional development. Viewed in terms of annual flows, housing investment typically comprises 2 to 8 per cent of gross national product (GNP) and 10 to 30 per cent of gross capital formation in developing countries. In terms of flows of services, housing provides services ranging between 5 and 10 per cent of GNP. In terms of assets, housing makes up from 20 to 50 per cent of the reproducible wealth in most countries. The desire by most people to own a house suggests that housing is a major motivation for savings, mobilizing substantial amounts of financial resources in an economy. In terms of employment, the residential industry is a key ‘port of entry' to urban labour markets, employing significant segments of the population. In many respects, housing is also a tool for regional development and an instrument for macroeconomic management. Housing investments directly affect a national economy, in particular contributing to economic development and growth. However, the broader economic gains from housing investment can be expected to vary by type of housing investment. In both developing and transition economies, housing investment takes various forms, including upgrading or renovating of existing houses, construction of traditional and low-cost housing, and building of conventional and luxury houses.
These different types of housing investments affect economic development and growth differently, in part because of different input requirements (for example labour and building materials). Low-cost housing, for example, has been identified as a better employer than luxury and high-cost housing, because it uses substantial amounts of locally produced building materials and low-skilled labour. In contrast, luxury and high-rise buildings require industrialized building techniques based on sophisticated technology and use high-skilled labour and substantial amounts of imported materials. As a result, such housing investments are expected to have much less of a growth effect on a national economy vis-à-vis low-cost housing (for example less direct employment). Hence, an analysis of the relationships between housing and economic development needs a consideration of the types of investment and the policy context within which such investments are being made. Similarly, broader economic gains from housing investments can also be expected to vary by the size and nature of the economy, the scale of investments, and the level of economic development of the country.
In economies with high levels of wealth, households and families can demand various ranges of residential units and related services without compromising their abilities to meet other needs. Also, the capacity of countries to finance housing programmes depends largely upon the level of resources available to them and the level of economic growth and development. Size in terms of population and family culture are also critical factors determining demand for housing and related services. The key point here is that housing investments vary across countries and regions based on these factors and, consequently, macroeconomic impacts such as employment creation, income generation and savings, growth effects, and labour productivity vary accordingly.
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